Evaluating an Increase in the Minnesota Gas Tax

After evaluating the proposed increase in the Minnesota state gasoline tax, we believe that this particular tax hike has many attributes that make it a desirable type of revenue increase.  Its ease of implementation, economic efficiency, and sustainability over time make it an attractive option for the state to generate revenue.  However, we found that the tax may disproportionately impact lower-income residents, and because of restrictions on how gas tax revenue can be used, it may be difficult for lawmakers to find solutions to offset some of these consequences for poorer, auto-dependent Minnesotans.  Still, we believe that Minnesota must meet its responsibilities to maintain a high-quality transportation infrastructure for its residents, and that this increase makes sense for Minnesota at this time. 

The gas tax increase will be easy for the state to implement because it is already collecting taxes on gasoline.  An increase in this tax should not add any overhead to the state’s tax collection setup, and Minnesota taxpayers should at least be reassured somewhat by this fact.  The low cost of implementation could allow lawmakers to make a persuasive case to their constituents that no additional overhead makes this tax more affordable than other options, increasing the political feasibility of such an increase.

The tax is also economically efficient as a tool for generating revenue because demand for gasoline is inelastic.  Minnesotans are dependent on their automobiles, and cars are by far the dominant mode of transportation throughout the state.  While this may mean that many Minnesotans will be affected, it also means that the tax will be effective because of the demand inelasticity.  Driving patterns and habits are difficult for individuals to break, so the state should expect that revenue would be generated from across the population. This also indicates that the tax increase would be a sustainable revenue source, as the inelasticity will ensure that revenues will be relatively consistent over time.  In addition, current constitutional requirements that gas taxes only go to road infrastructure (and not public transit, bike infrastructure or pedestrian infrastructure) will ensure that these funds do not contribute to expanded transportation options, making auto dependence likely to continue into the future.

Our evaluation found that the most significant drawback to the gasoline tax increase is the disproportionate burden that it places on poor drivers.  Since the increase is a flat tax placed on each gallon of gas, a Minnesota gas consumer’s ability to pay the tax is not factored into the amount of the increase. This will have consequences for car-dependent households with lower incomes.  However, because revenues will be spent almost strictly on road improvements, the tax is more equitable from a benefits-received standpoint as those who drive the most will be paying an amount more closely proportional to their use of this public resource.

Overall, we believe that the increased gas tax is a good revenue increase.  Tax increases are never popular, but an increase in the gas tax has advantages that other tax increases do not have.  Lawmakers should attempt to mitigate the effects on lower income families, possibly through credits or other instruments whereby a Minnesota taxpayer’s ability to pay is considered.  Based on our evaluation of this tax, we expect it to be an effective instrument to generate revenue in Minnesota if it is implemented.

-- Group 4, PA 5113 - State and Local Public Finance, Spring 2013

Kick the Can: Considering the Soda Tax

Governments at all levels are looking under their collective couch cushions for every penny they can find. Creative revenue generating ideas range from taxing pornography, to building racinos, to (legalizing and then) taxing marijuana. These are all variations on the tried-and-true “sin tax” formula.

A family friendly, PG version of a sin tax idea has been recently kicked around in the form of a soda tax. The U.S. Senate considered the tax in 2009 as a way to help pay for President Obama’s health care initiative. Both the Mayors of New York and Philadelphia as well as New York Governor David Patterson sought soda taxes in recent budget proposals.

On the surface, the soda tax idea is a good one: Offset the costs of healthcare programs with the tax, while simultaneously battling the obesity epidemic. It’s roughly the same justification for the steep rise in cigarette taxation in recent years. One could make the argument that, in fact, the nation’s obesity epidemic is of a greater public health concern than are the impacts of smoking.

But, the issue isn’t so clear cut. Is the soda tax justifiable when there is no essential nexus between the tax and the programs it supports? If the soda tax revenue is simply funneled into a state’s general fund, is it still justifiable on public health grounds?

What of a state budget that purports to use the funds for health care programs, but also makes cuts to those same programs in the same budget, as this article points out? What if the soda tax did not actually reduce soda consumption, as some studies claim that it would not?

Considering that a sales tax is regressive, and considering that some studies show that the poor tend to consume more sugary beverages than the average citizen, wouldn’t the brunt of the tax fall disproportionately on the poor? Is the tax equity issue enough to undermine the purported health benefits?

The soda tax debate is representative of the type of dialogue we're likely to see in the coming months as Minnesota looks to fill its 6.2 billion dollar revenue gap with new and creative funding sources.

Please, anything but a pizza tax.